Smart College Planning: How High-Net-Worth Families Can Navigate Financial Aid Without Sacrificing Wealth

For high-net-worth families, paying for college often requires a different approach to financial aid. While traditional need-based financial assistance may not apply due to substantial income and assets, strategic planning can still help maximize opportunities for aid without compromising wealth. By using smart, proactive strategies, you can reduce the impact of large assets on financial aid eligibility and effectively plan for their child's education costs.

The Role of Income vs. Assets

Before diving into strategies, it's important to understand how financial aid eligibility is determined. The Free Application for Federal Student Aid (FAFSA) and the CSS Profile, used by many private colleges, assess two main factors in determining eligibility: Income and assets.

While both are considered, income plays a more significant role in the calculation of need-based financial aid. This is because income is generally seen as a more reliable indicator of a family's ability to pay for college in the current year. However, assets, such as real estate, investments, and savings accounts, also contribute to the Expected Family Contribution (EFC) and can affect aid eligibility.

For high-net-worth families, assets can be particularly impactful. The way in which assets are held—whether in individual names, trusts, or custodial accounts—can have a significant effect on how much aid your family is eligible for. That’s where strategic planning comes into play.

The Importance of Strategic Asset Allocation

By definition, high-net-worth families have substantial assets, and these can influence financial aid calculations. However, how assets are structured can make a big difference in your child’s aid eligibility. Certain assets are weighted more heavily than others when determining the EFC, and by shifting assets into the right places, you can help mitigate their impact on aid eligibility.

For example, retirement accounts (like 401(k)s and IRAs) are not considered assets when calculating financial aid. This means that contributing to these accounts can lower your reported assets and, in turn, potentially increase the financial aid your family qualifies for. In contrast, assets held in the child’s name, such as custodial accounts (UGMA/UTMA) or brokerage accounts, are typically assessed at a higher rate than those held by the parent.

Real estate and other non-liquid assets, like a family business, can also complicate financial aid assessments. However, working with a fiduciary financial advisor to strategically allocate these assets or transferring some to a trust can help reduce their impact. It’s important to review your asset allocation regularly to ensure you’re positioned to maximize financial aid eligibility without compromising your wealth-building strategies.

Using 529 Plans and Custodial Accounts Effectively

Two popular tools for saving for college are 529 plans and, as mentioned above, custodial accounts. Both offer tax advantages, but their impact on financial aid differs.

A 529 plan is one of the best ways to save for college while minimizing financial aid impact. When owned by the parent, 529 plan assets are treated as parental assets, which are assessed at a lower rate than student-owned assets. Additionally, earnings grow tax-free, and withdrawals used for qualified education expenses are tax-exempt.

For maximum aid eligibility, it’s best for parents to own the 529 plan, not the student, and to limit the amount of money held in the student’s name. This ensures the plan benefits from the favorable treatment under financial aid formulas.

On the other hand, custodial accounts are treated as the child’s assets, which can negatively affect financial aid eligibility. Since these assets are assessed at a higher rate (typically 20% of the value), families should carefully consider whether custodial accounts are the best vehicle for saving for college. These accounts can still offer benefits for financial education, but other strategies may be more effective for reducing financial aid impacts.

The Power of Gift Planning

Gift planning also plays an important role in reducing the impact of assets on financial aid. By structuring gifts to family members, you can reduce the assets considered in your name and potentially qualify for more financial aid.

For instance, one option is gifting to other family members, such as grandparents, who can then contribute to a 529 plan. Since gifts to grandparents are not reported as parent or student assets, this can be a way to avoid the financial aid penalty while still saving for the child’s education. Just be mindful of the IRS’s annual gift exclusion limit.

Setting up a trust can be another way to gift assets, but this approach requires careful consideration. If the trust is structured in a way that keeps the assets outside of the child's name—such as by having the assets managed by a trustee for the benefit of the child—these assets may not count against the child when applying for financial aid. However, if the child has control over the trust or if the assets are ultimately considered the child's, they may be counted as assets for financial aid purposes.

This strategy can be beneficial for long-term wealth planning, but it's important to consult with an estate planner or fiduciary financial advisor to ensure the trust is structured in a way that minimizes the impact on aid eligibility.

Need-Based Aid vs. Merit-Based Scholarships

Another key point to understand is the distinction between need-based aid and merit-based scholarships. While need-based aid is based on your family’s financial situation, merit-based scholarships—either from a university, private organization, corporation, or community foundation—are awarded for academic, athletic, or other achievements. These scholarships can still significantly reduce college costs, even for families who may not qualify for need-based aid.

The key is to research and apply for any such merit-based scholarships early—even during a student’s junior or sophomore year—since some scholarships require long lead times for applications and many have deadlines well before the start of the school year. It’s also important to note that some merit-based scholarships are renewable, but they may require maintaining a certain GPA or continued involvement in specific extracurricular activities. Be sure your child clearly understands the renewal requirements during the application process.

In some cases, students may be eligible for both need-based aid and merit-based scholarships. And though need-based aid typically cannot be stacked on top of merit-based awards in certain ways, many schools allow both forms of aid to be used together. Feel empowered to work closely with financial aid offices to maximize both opportunities and reduce the overall cost of education.

Final Thoughts

For high-net-worth families, college planning is an opportunity to blend smart financial management with long-term goals. By thoughtfully structuring your assets, utilizing tax-advantaged savings vehicles, and pursuing a mix of need-based aid and merit scholarships, you can create a strategy that aligns with both your educational and financial objectives. The key, however, is to take a proactive approach.

Need help integrating your family’s college planning into your overall financial strategy? Reach out to learn how we can help.